B of A High Yield Broad Market Index falls 0.59% on week; 2007 return drops to 3.64%

By Paul Deckelman

New York, June 18 - The Banc of America Securities High Yield Broad Market Index lost 0.59% in the week ended Thursday - its third consecutive downturn, including the 0.45% loss in the previous week ended June 7, after eight straight weekly advances before that.

The two sizable back-to-back losses represent a definitive halt to that previous pattern of strength; after having begun the year with two months of strong gains, the index fell into a pattern of choppiness seen roughly from late February through early April, but after that had been again showing consistent strength, until the beginning of the current downturn at the very end of May.

Although the last several weeks have been on the downside, gains have still been seen in 17 weeks out of the 24 since the start of 2007, against just seven losses - part of a larger pattern of strength that the index has shown since late June of last year, with gains recorded in 43 weeks out of 51 during that stretch. That, in turn, was part of a still-larger trend of positive returns in evidence throughout most of last year and now extending into the first half of 2007, according to a Prospect News analysis of the B of A data.

The index's year-to-date return declined to 3.64% in the most recent week, down from 4.24% seen in the week ended June 7 and well below the index's 2007 peak level of 4.72% seen the week ended May 24. The index finished 2006 with an 11.89% return - nearly six times 2005's total 2.10% return.

The index's average spread over Treasuries, which in the prior week had tightened to its low for the year and new record low of 263 basis points from 267 bps previously, widened out in the latest week, to 272 bps, as the index took at least a temporary break from the spread-tightening trend that had been seen throughout last year, when high-yield spreads started at 384 bps off Treasuries and ended at 305 bps over, and which had carried over into 2007 as well and which has been seen in most weeks, except for the aforementioned period of turbulence. However, even with the modest widening in the latest week, the spread remains well inside its 2007 peak level of 313 bps, reached in the week ended March 15.

The index's yield to worst, which previously had risen to 7.69% from 7.56% the week before, moved even further upward, to 7.88%, in the most recent week.

The index tracked 1,646 issues of $100 million or more, well down from 1,663 issues the week before, while its overall market value accordingly dropped to $639.2 billion from $651.8 billion the previous week. B of A sees the index as a reliable proxy for the high-yield universe, which by some estimates is around $1 trillion in value.

Lowest credit tier still on top

On a credit-quality basis, with all three of the credit tiers into which B of A divides the HY Broad Market Index showing losses this past week, the lowest tier of the three - those issues rated B- and below, accounting for 33.99% of the index - had the best performance, relatively speaking, with the smallest loss, 0.44%. This was followed by the middle tier - those issues rated BB-, B+ and B, making up 44.37% of the index - which lost 0.65%, with the uppermost tier - those issues rated BB and BB+, comprising 21.63% of the index - plunging 0.72%.

It was the second straight week the tiers finished in that order - in the week ended June 7, the lower tier lost 0.29%, the middle tier declined 0.43% and the upper tier dropped 0.76% - and was also the fifth week out of the last seven, and over the longer-term, the 11th week out of the last 18 in which that particular order has prevailed.

That also reaffirmed recent patterns of strength, neutrality and weakness shown by the individual tiers. The lowest tier continues its long-standing relative dominance, having now been on top for six consecutive weeks, in 10 weeks out of the last 11 and over the longer term, in 23 weeks out of the last 27. The middle tier has now lived up to its name and has been sandwiched between the other two tiers in seven weeks out of the last 11 and longer term, in 15 weeks out of the prior 22, while the upper tier has now been at the bottom of the pile for nine weeks out of the last 13 and in 16 weeks out of the prior 23.

Noting the fact that the index's plunge was led by the high-quality junk issues, B of A's analysts declared that the BB credits (the upper tier partially, but not completely, overlaps this subset) "underperformed" relative to the rest of the index, plummeting 0.76% on the week. B-rated paper - similar to, but not exactly the same as the middle tier - was seen to have lost 0.57%, while CCC-rated paper, which largely, but not totally, comprises the bottom tier, had the smallest loss, at 0.43%.

Primary issuance retreated from the levels seen in the prior week. In the latest week, $4.2 billion of new paper priced, versus $6.1 billion the week before, with the analysts calculating that year-to-date new issuance stood at $108.7 billion at week's end. Issuance totaled a record $179.3 billion in 2006, according to B of A's calculations.

Treasury rise, wider spreads move junk

The analysts further observed that for yet another week, the junk market's loss was being driven by the continued rise in risk-free [i.e., Treasury] rates, as the yield on the benchmark 10-year government issue rose - it jumped another 9 bps on the week to finish at 5.22% as of Thursday - although unlike the previous two weeks, average high-yield spreads were also wider, increasing by some 10 bps on the week, helping to further erode market performance.

Weekly reporting high-yield mutual funds, as measured by AMG Data Services, showed a yawning $399.6 million outflow in the week ended last Wednesday, more than reversing the $167.4 million inflow seen the week before. Year-to-date cumulative inflows fell to about $1.2 billion from $1.6 billion previously, with the average weekly inflow sliding to $51 million, the analysts said, from $71 million the week before.

In the latest week, 39 of the 42 industry sectors into which B of A divides its high-yield universe were in negative territory, with no sectors in positive territory and three flat 0.00% readings, neither a loss nor a gain, although it should be noted that these - credit insurance, leisure equipment and products, and water utilities - were new sectors created in the sector restructuring that took place last year and do not as yet have any issues represented in them.

It was the second straight week that the sector breakdown has been overwhelmingly negative, on top of the previous week's split at 36 sectors in the red, just three in black, and the three flat readings from the empty sectors. That represents a sharp deterioration from the previous pattern of solidly positive sector breakdowns that up through the week ended May 24 had been seen in 45 out of the previous 48 weeks, going back to last June, and on an even longer-term basis, in 66 weeks out of the prior 78, encompassing virtually all of this year so far as well as last year, and in fact extending all the way back to late 2005.

Other health care week's worst

In the latest week, other health care nosedived 1.94%, by far the biggest loss of any sector, replacing the life/health insurers as the cellar-dweller. In the previous week, the insurers had an index-worst 1.11% loss - the third time in four weeks that the group had the worst showing of any sector, and the fourth time in the previous five weeks that the insurers were among the Bottom Five worst-performing sectors.

Insurance brokers (down 1.64%), consumer durables/non-auto (down 1.18%), property/casualty insurers (down 1.10%) and pipelines (down 1.04%) rounded out the latest week's Bottom Five. It was the second straight week there for the pipeline sector, which had also been among the big losers the week before with a 0.80% loss.

Diversified financials has smallest loss

On the upside, excluding the three empty sectors and with all the sectors which actually had bonds trading in them in negative territory, the Top Five list of the week's best-performing sectors was totally comprised of sectors which merely had smaller losses than all of the others.

Diversified financials had the smallest loss, at 0.14%, taking over as the top-spotter, in relative terms, from health care equipment and services, the champion the previous week with a 0.18% gain. It was an improvement for the diversified financials group, which had been among the Bottom Five in the June 7 week with a 0.86% loss.

Banks (down 0.16%), textile and apparel (down 0.19%), consumer products (down 0.23%), and diversified telecommunications (down 0.24%) rounded out the latest week's Top Five list. Textile and apparel was also in the Top Five a week earlier, with a 0.01% gain.

Health care services tops for year

On a year-to-date basis, with 24 weeks now in the books, the health care services sector remains the best performer, although its 2007 return declined in the latest week to 6.50% from 7.30% previously.

Health care equipment and services was close behind in second place with a 6.46% cumulative return, down from 7.24% the week before. Industrial products remained third-best at 6.29%, down from 6.84%.

Consumer non-cyclical/other moved up a notch from fifth-strongest to fourth, even as its 2007 gain retreated to 5.49% from 6.08%. That let the sector edge out the previous week's fourth-place holder, metals and mining, which fell to fifth place with a 5.48% return, down from 6.08% before. Continuing the back-and-forth battle for the last spot on the leader board that has gone on for several weeks now, entertainment - which in the previous week had fallen from contention, booted out by commercial services - managed to turn the tables and regain sixth place with a 5.28% return, down from 5.79% before. That was good enough to bypass commercial services, which fell from contention with a 4.89% total, down from the previous week's 5.83%.

Insurance brokers year's worst

On the downside, the year's worst-performing sector, insurance brokers - part of the latest week's Bottom Five - slid into the red on a cumulative basis, to a 1.01% loss, from a 0.64% gain the week before. It was the only sector in negative territory.

Omitting the three empty sectors, the other health care sector - also part of the Bottom Five, as the week's worst performing sector - slid to second-worst for the year from Number-Five previously, with a 0.16% return, down from 2.14%. Other telecommunications fell to third-worst from fourth, as its return declined to 0.38% from 1.34%. The life/health insurers improved to only fourth-worst from second-worst previously, even as the group's cumulative return was more than halved, to 0.40% from 0.92% a week earlier. Top Fiver and this week's index leader diversified financials also improved, to only fifth-worst from third-worst previously, its 2007 return at 0.98%, though that was down from the previous week's 1.12%.

And real estate, not previously among the worst laggards, fell to sixth-worst at 1.91%, down from the prior week's 2.73%, while the previous week's sixth-worst year-to-date performer, banks, had a small enough loss to land among the Top Five and to improve the sector's position by taking it out of the worst finishers with a 2.45% return, not too much less than the prior week's 2.62%.

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